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The European Union has recommended its 27 member states "prevent" all financial transactions that support Israel's settlement activities in the occupied West Bank, an internal report on Jerusalem found on Wednesday.

In its Jerusalem Report 2012, the European Union suggested member states "prevent, discourage and raise awareness about problematic implications of financial transactions, including foreign direct investments, from within the EU in support of settlement activities, infrastructure and services."

In a strongly-worded 15-page report, the EU also calls to "ensure that imports of settlement products do not benefit from preferential tariffs" and make sure that all such products are clearly labeled as originating from Israeli-occupied areas.

Authored by EU heads of mission in Jerusalem and Ramallah, the report makes nine recommendations on settlements, six of which are related to financial translations linked to or supporting Israel's ongoing construction on occupied Palestinian land.

It also warns that EU programs should not be "used to support settlements and settlement-related activity, including funding for research, education or technological cooperation."

And it proposes member states raise awareness about "the financial and legal risks involved in purchasing property or providing services in settlements."

Another recommendation which applies particularly to the city's annexed eastern sector, suggests member states "develop and promote voluntary guidelines for EU tour operators to prevent support for settlement businesses in east Jerusalem."

Relations between Israel and the EU have been particularly tense in recent months, with Europe voicing increasingly vocal discontent over a raft of Israeli plans to build more than 5,000 new settler homes in and around east Jerusalem.

Israel has long feared that the 27-member bloc, its largest import and export market, could move to implement a series of punitive trade sanctions against the Jewish state over its ongoing settlement activities.